Umbrella companies

The basic aim of an umbrella company arrangement is to shift responsibility for tax, national insurance and employee rights from the employment business on to the worker. This employment structure has grown in popularity with employers following HMRC’s crackdown on intermediaries who use false self-employment (see above). It is described by UCATT as “an extreme form of workplace exploitation”. Umbrella companies often go hand-in-hand with the use of zero hour contracts (see page 40). These arrangements are usually put forward on a “take it or leave it” basis. Alternatively workers are encouraged to believe that they will get to take home more of their pay by entering into this kind of arrangement. Any gains are usually illusory.

The umbrella company employs the individual in return for a fee (as much as 30% of wages). The umbrella company formally contracts with the hirer to provide the work. As the worker’s “employer”, the umbrella company deducts PAYE tax and employee and employer’s national insurance from the worker’s pay packet.

The arrangement has many abusive features. In particular, many workers operating via an umbrella company are paid only the national minimum wage. Their earnings are then boosted artificially by mechanisms such as “expenses” and “performance related pay”. Holiday pay is often “rolled up” in breach of the Working Time Directive, and paid only at the national minimum wage rate. Pension contributions are also affected by the under-recording of wages, meaning that workers can end up with much smaller pension pots than they were expecting. They may also fail to qualify for earnings-related benefits such as SSP.

Umbrella workers are employees with statutory employment rights, but these rights are worthless because they are owed to themselves as “employer”.